"The Bank’s rate-setters will take heart from the strong likelihood that price pressures will continue to subside in the months to come."
CPI inflation rose by 4.0% in the 12 months to December 2023, up from 3.9% in November and the first time the rate has increased since February 2023, the latest ONS figures show.
On a monthly basis, CPIH rose by 0.4% in December 2023, the same rate as in December 2022.
CPIH inflation, which includes owner occupiers’ housing costs, rose by 4.2% over the year - the same rate as in November.
The largest upward contribution to both CPIH and CPI annual rates came from alcohol and tobacco, while the largest downward contribution came from food and non-alcoholic beverages.
Core CPI (excluding energy, food, alcohol and tobacco) rose by 5.1% in the 12 months to December 2023, the same rate as in November.
Industry experts were split on what the unexpected rise in inflation means for the Bank of England's monetary policy decisions and the future path of Bank Rate. Some said higher than expected inflation could mean the Bank holds interest rates for longer, while others said the picture was still positive.
Mark Taheny, senior director at corporate finance advisor Centrus, commented: “The Bank of England’s battle is far from over. However, while services and wage inflation are proving sticky, the UK swap market has fewer cuts priced-in than its US and Eurozone counterparts. This could result in a stronger Pound later this year. Viewed alongside a surprise economic expansion in November, we're finally seeing some long-awaited confidence in businesses for 2024.
“However, many are keeping a grave eye on global affairs which could knock progress off track. Though issues in the Red Sea are yet to have a material impact, rising tensions across the Middle East, the ongoing conflict in Ukraine, and the Taiwan election result all have the potential to cause large spikes in prices."
Founder and CEO of My Community Finance, Tobias Gruber, said: "The Bank of England seems to be losing the battle against inflation, and these shocking figures mean Andrew Bailey may need to contemplate yet another base rate hike, spelling further misery for borrowers.
“The strategy of increasing interest rates, aimed at curbing spending, paradoxically translates to added hardship for millions grappling with the prospect of shelling out hundreds of pounds extra each month on their mortgages.
"It's a perplexing scenario for borrowers who struggle to comprehend why diligent homeowners are forced to shoulder the burden of getting inflation under control, while the banks continue to reap the benefits. This raises fundamental questions about the fairness of the current economic approach and whether it genuinely serves the interests of hardworking people."
Ben Thompson at Mortgage Advice Bureau added that the figure isn’t a massive shock to the system, but we might have to wait a little longer for the first base rate cut. He said: “A slight tick upwards in inflation won’t be a massive shock to the system, as inflation was always unlikely to fall in a straight line in 2024. However, the concern now is if inflation doesn’t start to come down again soon, we might have to wait a little longer for the first base rate cut from the Bank of England.
“Swap rates have been unsettled in recent weeks and have led to a host of rate changes from lenders as the cost of funding drops. This has been welcome news for those looking to remortgage or get onto the housing ladder, and we hope that today’s slight increase won’t be the start of an upward trend.”
A pause for breath for inflation, before the economy blossoms in spring
However others remained more upbeat about the latest figures, stating that pressure on the Bank of England to begin cutting rates is unlikely to relent.
Richard Carter, head of fixed interest research at Quilter Cheviot, commented: “Though this increase does not take the figure drastically higher, it shows that the UK’s battle against inflation is not yet over and the situation remains precarious. The festive season saw alcohol and tobacco lead the way as drivers of this uptick, while the largest downward contribution came from food and non-alcoholic beverages.
“Though inflation has risen, the latest GDP figure left the UK teetering on the edge of a technical recession and the labour market is showing signs of weakening, so there is no doubt that the Bank of England will continue to face increasing pressure to begin cutting rates. What’s more, the falls in inflation prior to December have also started to take effect on pay, with total pay growth slowing more than expected to 6.5% in November, down from 7.2% in October, which will only exacerbate this further.
“Not only has the headline rate of inflation seen an unwanted uptick, but Core CPI (excluding energy, food, alcohol and tobacco) still remains relatively high. Core inflation has been falling much more gradually than the headline figure and now sits at 5.1%, holding steady at the same rate as November. Progress here is likely to be slow, so the Bank may resist making rate cuts until it returns to a more palatable level.
“Significant global headwinds also remain, not least the events in the Red Sea which could have a considerable impact on consumer prices in the coming weeks. So, whether the Bank buckles under the pressure and begins cutting rates sooner than it might have originally liked remains to be seen.”
Adam Oldfield, chief revenue officer at Phoebus Software, said: “Predictions of another fall in inflation were premature, it appears. Not the best news for those watching the Bank of England’s every move and hoping for the first drop in the base rate. However, all the signs in the housing market in the first few weeks of 2024 have been positive. House prices didn’t take the tumble that was expected in 2023 and mortgage rates continue to fall. Although, the headlines will be jumping out this morning the reality is that unemployment isn’t going up and wages are ahead of inflation. It’s definitely not all bad news.
“The problem in the long term is, as always, supply. House prices didn’t fall, as was expected, because fewer properties came to market and failed to meet demand. There, is no quick fix for that problem, so lenders and brokers will have to be creative and look for every opportunity in the coming months. As we head towards spring, if rates continue to look more favourable, we could see more homes come on the market. It’s still a positive picture at the moment, but there are a few ifs."
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, added: “The ONS’s announcement of December’s inflation data confirms a pause for breath following sharper declines than expected in the two months prior. The monthly headline rate of CPI edged up by 0.4%, the same rate as November, a consequence of retailers increasing prices following the Black Friday sales, but this rise disguises continued falling food prices seen across autumn. Although prices are still rising in aggregate and remain above the Bank of England’s desired 2% target, the general direction of travel indicates that the economy will begin to blossom again as winter turns to spring.
“When the Bank releases its overhauled forecasts, estimates will likely reflect this encouraging trend in domestic price pressures. This data has come too soon to capture any potential upside risk associated with shipping disruptions in the Red Sea, but this will likely be reflected in next month’s figures and will likely make little more than a marginal difference.
“The Bank’s rate-setters will take heart from the strong likelihood that price pressures will continue to subside in the months to come. Energy regulator Ofgem is also expected to deliver a sharp drop in the utility price cap in April, which will ease pressures on British households and may well be sufficient to drive inflation down to target far sooner than the Bank’s current expectations.”
